We introduce a novel sustainable capital instrument: the skin-in-the-game bond. With features inspired by contingent convertibles (CoCos), this bond is an alternative for the green, social, sustainability and sustainability-linked bonds available on the market. A skin-in-the-game bond is linked to the performance of a benchmark that relates to the broad concept of sustainability in at least one of its pillars, being the environment (E), society (S) or corporate governance (G). When the benchmark hits a preset trigger level, (part of) the bond’s face value is withheld and directed into a government-controlled fund by the issuer. The skin-in-the-game bond offers a higher yield to investors than a standard corporate bond, in order to compensate for the risk of losing out on (part of) the investment. Both issuer and investor have skin-in-the-game; the embedded financial penalty incentivizes the preservation of a favorable benchmark value. In this presentation, we elaborate on the general concept of a skin-in-the-game bond, as well as on a tailored valuation model, illustrated by two examples: the ESG and nuclear skin-in-the-game bonds.
